We find out more about options trading, including the reasons to trade options, risks of options trading, and how to start options trading in Singapore.
This post was created in partnership with Tiger Brokers (Singapore) Pte Ltd. All views and opinions expressed in this article are Beansprout's objective and professional opinions.
Options trading has grown in popularity in recent years.
The number of US option contracts traded in 2022 reached 10.3 billion, surpassing the 10-billion mark for the first time in history.
In fact, the number of US option contracts traded has more than doubled over the last three years from 4.9 billion contracts in 2019.
Let us find out more about options trading, including the reasons to trade options, risks of options trading, and how to start options trading in Singapore.
What are call options and put options?
In simple terms, call options and put options are two fundamental types of options contracts.
Call options gives you the right to buy a specific quantity of an underlying stock at a predetermined strike price on or before an expiration date. However, you will not be obliged to buy the stock. In other words, call options provide an opportunity for traders to profit from rising asset prices.
Put options gives you the right to sell a specific quantity of an underlying asset at a predetermined strike price on or before the expiration date. Once again, you will not be obliged to sell the stock. Put options hence offer a way for traders to profit from falling asset prices.
To learn more about call and put options, you can refer to the guide here.
Why option trading may have grown in popularity
Some of the reasons options trading has grown in popularity include the ability to hedge against risk, a significant number of strategies to position based on the market movements, as well as the potential to enhance the yield of a portfolio.
#1 - Hedge against risk
Using options to hedge our existing investment holdings is also commonly used by options traders.
Put options, for example, are commonly used as a hedging instrument for investors to reduce their exposure to risk in the event that a stock in their portfolio decreases in value.
#2 - Flexibility of options strategies to choose from
There are many different options strategies available and users have the flexibility to either: (i) buy a call option (ii) sell a call option (iii) buy a put option (iv) sell a put option.
This opens up many possibilities to potentially make a profit if you are able to correctly anticipate where the market is headed.
#3 – Potentially enhance yield of portfolios
Investors may also generate income from their portfolios by participating in the buying and/or selling of options contracts.
One method is to sell covered calls on stocks that you already own, or covered puts on stocks that you have the cash to purchase.
What are the risks of options trading?
As with all investments, options trading comes with its own set of risks that every options trader should be aware of.
As derivative instruments, options come with complex risks associated with the underlying security risk as well as the limited time frame.
Options contracts have expiration dates–unlike stocks–which means you must be right about the direction and timing of the underlying security’s movement.
If you’re wrong or time runs out, you could lose your investment.
Furthermore, strategies such as short puts and short calls are also risky as they come with limited upside but unlimited downside.
In other words, options are highly leveraged products, and should only be looked at if you have sufficient knowledge about its potential risks.
Step-by-step guide to trade options
Next, we will demonstrate how you can trade options in Singapore with a step-by-step guide.
We will be using Tiger Brokers in this guide on options trading. Tiger Brokers offer a comprehensive platform for users who are interested to trade options, including highly competitive options trading commission and excellent options trading tools.
#1 - Choosing an option
As with buying stocks, first you must choose your option.
One popular approach amongst option traders is to choose options of stocks with higher volatility. This is because these traders may take the view that greater the price movements of a stock, the higher the likelihood that these large moves will result in an in-the-money option.
After entering the option chain, you can select a contract to view the details across the Call and Put tabs.
This shows you many different figures for various indicators or metrics that will be important for your options strategy.
This would include metrics such as the intrinsic value (IV) and time value. You would also get acquainted with the Greeks - Delta, Gamma, Theta and Vega.
At this point, you will be presented with three options: buy, sell, or close. In this illustrative example, we will demonstrate using a purchase of a call option.
After you have purchased the call option, you can then adopt a few different strategies including:
- Sell and close before its expiration date
- Hold until expiration
#2 - Close before expiration date
The first way to execute an open position is to close the position before its expiration date.
Let’s say Tesla’s share price is US$220 on 1 November 2023. If you expect the price to go up, you may choose to buy a Tesla call option with a strike price of US$250 and expiration date on 30 January 2024.
If Tesla’s share price rises to US$260 on 1 January 2024, you may choose to close the ahead of the expiration date.
#3 Exercise at expiry
Another way to execute an open position is to hold the option all the way till its expiry date.
Let’s say that Tesla’s share price does indeed rise to US$270 by 31 January 2024, you can then choose to exercise the option and buy Tesla shares at US$250.
As each option typically represents 100 shares, this means that you will need to deposit US$25,000 to meet account margin requirements.
The above example is for illustration purposes only, and excludes any fees that may be incurred.
What are the fees for trading options on Tiger Brokers?
Tiger Brokers is currently offering new customers a promotional rate of USD 0.65 per contract for trading US options, with no minimum fees.
In order to participate, all you need to do is sign up and open an account with Tiger Brokers to enjoy this promotion. The promotion will be available until 31 March 2024.
Better yet, you will also receive an additional 180 days of unlimited commission-free trades for US stocks.
For current Tiger Brokers users, don’t worry, because you are also eligible to claim the ultra-low US Options Fees Coupon to enjoy the same fees when trading US options.
Outside of the promotion, Tiger Brokers offers a competitive pricing structure through a tiered Commission Plan.
For more information about their pricing structure, you can refer to the table below or find out more here.
Fixed Commission Plan
|Commission Fee||Platform Fee|
|US$0.35 per contract; no minimum||US$0.30 per contract; no minimum|
Tiered Commission Plan
No. of contracts traded per month
Commission Fee per contract
US$0.30 per contract; minimum US$ per order
More than 100,001
|Source: Tiger Brokers as of 25th October 2023|
What would Beansprout do?
For traders who are looking to hedge their positions or position their portfolios to benefit from expected market movements, options trading may provide more flexibility to deploy various strategies.
However, options trading has risks relating to underlying security risks, limited time frame, amongst other risks which traders should be aware of.
When trading options, we would choose a platform with highly competitive commissions and comprehensive suite of options trading tools.
Tiger Brokers is currently offering a competitive fee of USD 0.65 per contract for US options, with no minimum fee. You can find out more about the promotion here.
If you are looking to transfer your holdings out of TD Ameritrade to Tiger Brokers, refer to the guide here.
To learn more about options, watch the tutorial for beginners here.
This advertisement has not been reviewed by the Monetary Authority of Singapore.
Any information provided in this article is meant purely for informational and investor education purposes, and should not be relied upon as financial or investment advice, or advice on corporate finance.
The information provided in this article are on an “as is” and “as available” basis without warranty of any kind, whether express or implied. Beansprout does not recommend any particular course of action in relation to any investment product or class of investment products. No information is presented with the intention to induce any person to buy, sell, or hold a particular investment product or class of investment products.
You may wish to seek advice from a financial adviser before making a commitment to purchase the product; and in the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question is suitable for you.
The information provided herein may contain projections or other forward looking statements regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance.
Please refer to the Tiger Brokers (Singapore) Pte Ltd’s website for more information on the full T&Cs and disclaimers.
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